Heating oil off; focus on distillates

API estimate of 13.8-million-barrel drop in crude is derided

By

LisaSanders

DALLAS (MarketWatch) - Heating-oil futures led petroleum and gasoline lower at Wednesday's close on the New York Mercantile Exchange, as traders turned their attention to supplies of distillate fuels following surprise reports on U.S. crude inventories.

July heating oil dropped 3%, or 4.8 cents, to close at $1.5528 a gallon. July crude futures eased 2.3%, or $1.22, to close at $52.54 a barrel after trading as high as $55. July gasoline shed 1.2%, or 1.82 cents, to close at $1.4975 a gallon.

The Energy Department said distillate inventories rose 1.3 million barrels, citing an increase in diesel fuel. The American Petroleum Institute said they rose 3.1 million barrels.

But distillate-fuel demand averaged 4.1 million barrels a day over the past month, 6.6% more than in the same period last year, the Energy Department said. Demand for jet fuel rose 3.4% from last year.

The reports on crude supplies "caught people by surprise, but the distillates are right in line with estimates," said Mike Fitzpatrick, energy analyst at Fimat.

As the numbers sunk in, the selling momentum seen Tuesday resumed, he added.

The Energy Department said crude supplies fell 3 million barrels in the week ended June 3. The API said they dropped 13.8 million barrels. The data were contrary to most analysts' expectations.

Tim Evans, senior energy analyst at IFR Markets, said he usually doesn't comment on the API data, but Wednesday's report prompted him to explain why.

"A drop of this magnitude simply does not make sense, yet the API apparently lacks the ability to screen their estimates for nonsense," he said in a note to clients.

Analysts view the Energy Department report as the more reliable of the two because the government agency mandates that oil companies supply them with data, while the information the API gets is voluntary.

Analysts at Economy.com viewed the API data as "implausibly large."

"Indeed, this is not the first time that the API numbers show unusual weekly fluctuations," they told clients. The pattern suggests that the API will report a sizable build to crude supplies next week, which would offset much of the draw, the analysts said.

The Energy Department's report of a decline in supplies results from reduced imports, "an indication that refiners are either taking a more active role in reducing working stocks or perhaps a function of the Memorial Day holiday. We do not view it as indication of a lack of availability," Evans said.

Over the past four weeks, gasoline demand averaged 9.4 million barrels a day, 2.4% more than in the year-ago period, the Energy Department said.

The Energy Department reported a 100,000-barrel decline in gasoline supplies in the week ended June 3. The API said they rose 1.1 million barrels.

"We're starting to see consistently stronger demand numbers and they are starting to take a toll on the refiners' ability to meet demand," said Phil Flynn, senior market analyst at Alaron Trading. "Without an unlimited supply of crude builds, it is difficult to keep inventories up."

Refineries operated at 95% of capacity last week, down from 96.2% the week before, the Energy Department said.

July natural gas advanced shed 1.8%, or 12.7 cents, to close at $7 per million British thermal units.

Enercast predicts that on Thursday the Energy Department will report an injection of 108 billion cubic feet to natural gas storage.

"This strength in injections is expected to help provide temporary retracement in the recent surge in gas prices," said Agbeli Ameko, a managing director at Enercast, in a report.

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